Summer is almost here, which means working parents across the country are making plans for childcare during the upcoming months. Although some parents planned ahead for the cost of summer programs by signing up for a dependent care flexible spending account (FSA) at annual enrollment, they might not understand the ins and outs of how one works. For example, what is and is not covered? And when can participants be reimbursed for expenses? In this article, we answer those questions and offer some helpful tips for making the most of a dependent care FSA.
What’s eligible
Let’s take a look at eligible expenses. Dependent care FSAs are designed to support working parents, so it makes sense that eligible expenses are those that allow parents to work or to look for work. The most common use of dependent care FSAs is to cover day care expenses, such as childcare centers. Here are several other categories of care that qualify as eligible expenses:
- Day camps: Employees should think about expenses over the summer or seasonal periods (e.g., holiday breaks), when their day care provider or school might not be available, and set aside funds for these days as well. But employees should understand that camp deposits are eligible for reimbursement only after the camp has started. For example, a $250 deposit paid February 15 for a camp starting on June 1 is not eligible to be reimbursed until on or after June 1.
- Elder care: Custodial (non-nursing) care received in the employee's home or an adult day care facility may be eligible. Other eligible expenses include senior care, care at someone else’s home, and transportation to and from the location of the person or agency providing the care.
- Babysitting that is work-related: Care provided by a neighbor, family member or someone else who is not a tax dependent is eligible. It is important to note that the employee may not be responsible for withholding payroll taxes for these self-employed individuals; however, these individuals must include the income received if or when they file income taxes.
- Transportation: If a care provider takes a qualifying person to or from a place where dependent care is provided, those expenses may be eligible for reimbursement.
- Fees and deposits: Deposits, registration fees and application fees required to obtain care are eligible. Common examples include deposits required to reserve a place for a child at a day care center or preschool, nanny or au pair application fees and deposits required for day camps; however, these fees are eligible only after care has started.
- Sick childcare/backup childcare: There are times when children cannot go to their day care provider or school due to illness. The fees associated with sending a child to a sick-child facility or a backup care provider are eligible.
What isn't eligible?
It’s also important to know which expenses are not eligible for reimbursement from dependent care FSA funds. Employees cannot use dependent care FSA funds for the following services:
- Overnight camps: This is often an area of confusion. The IRS does not consider overnight camps to be work-related; therefore, the entire expense is ineligible (even the portion of care during the day).
- Activity fees: These typically include field trip fees, arts and crafts fees, fees for supplies, and fees for personal enrichment activities such as dance and piano lessons.
- Online/virtual day camps: This has become more popular since the onset of COVID-19. While virtual day camps may entertain or engage dependents in activities, they are not providing care of the dependent.
- Tutors: Tutors provide educational assistance, which is not considered primary care of the dependent. Examples of this could be music lessons or any kind of specific tutoring.
- Babysitting for an evening out: While the intent may be for the care of the dependent, the primary need is not work-related.
- School tuition: Only preschool tuition is eligible.
Timing of reimbursement
Even for those employees who have mastered what is and is not eligible under a dependent care FSA, one other factor should be kept in mind: In general, care must be received prior to seeking reimbursement.
- Prepayment of childcare expenses: If an employee pays ahead, he or she should wait to seek reimbursement until the actual care is received.
- Application fees and deposits: These are only eligible after the care has been received. If a deposit is required to be paid in June for a camp that doesn’t start until July, reimbursement is not available until after the camp has started in July.
- Prior to contributions coming out of paychecks: This has more to do with the timing of funds available for reimbursement. Dependent care requires that the funds come out of your paycheck prior to receiving reimbursement (unlike the health care FSA). Requests for reimbursement can be submitted once the care has been provided, but reimbursement will not be made until the funds have come out of the paycheck and been added to the dependent care FSA.
Conclusion
Dependent care FSAs can be a great tool for employees to save on childcare expenses. Knowing the ins and outs of what is eligible and when expenses can be reimbursed will help employees understand and maximize the use of this benefit for summer care and camps.
